Tag Archives: bear market

Where is the Stock Market Headed Next?

Posted December 2, 2010 by admin. tags:Tags: , , , , ,
Amazing Sunset


photo by ewen and donabel

Written by Dave Young, President and founder of Paragon

At this time of year, many people eagerly ask, “What’s next for the stock market?” To understand where it might be going, let’s look at where it’s been.

In October 2007, the Dow Industrials hit a high of 14,164. From that high we saw one of the worst bear markets in history with the Dow plunging to 6,547 in March 2009. Then, as many proclaimed the world was ending, we saw the Dow rally from that 6,547 low up to 11,205 by April 2010. Since April, we’ve spent the past six months going back and forth, only to recently hit a new high of 11,444 on Nov. 5.

So what’s next? If you follow what the media has said,  you might think the markets will never recover. Actually, it’s amazing how many people don’t realize the Dow has already rallied 75 percent off of the March lows. But some still believe the world is ending.

While there are many reasons to be concerned about the future, there are many more reasons to be optimistic:

1. The Fed wants the stock market up and interest rates low. It is taking its most aggressive action in history by buying $600 billion in Treasury bonds. A basic rule of investing is, “Don’t fight the Fed.”

2. Based on the results of the last election, politicians should be much more friendly to business than they have been. This should be good for the economy.

3. From a cyclical standpoint, the third year of a presidential term has almost always been the best year of the term for stocks. It’s known as the “sweet spot.”

4. Every time the market has lost ground over a 10-year period, like it has recently, performance the following decade has been positive.

TWO INVESTMENT RULES

I often receive subscription invitations to various investment services. Usually I ignore them, but this one was from a highly regarded firm. Its pitch was compelling. They offered eight “exclusive” stock picking services priced at $3,000 per year, per service. I told them I wanted to “look under the hood” — to see if the performance matched the hype.

I was shocked to discover that the historical performance of six of the strategies was terrible, and the other two mediocre. Surprisingly, most of the services were sold out.

What did I learn from this? Why would anyone pay $3,000 a year for a stock picking system that doesn’t add value? Apparently, many investors act on the “hype” but don’t investigate the numbers.

Rule No. 1:  Always thoroughly evaluate the numbers. Don’t rely on what sounds good. You would think a big, national firm with unlimited resources could put together a successful trading strategy. You could be wrong.

Rule No. 2:  Investing is very difficult, whether the firm is big or small. Don’t assume that the big firms have the advantage when it comes to investing. Because of their bureaucratic structure and large size, it can be harder to be nimble and creative.

Because investing is difficult, many investors become convinced that no one can beat the market. They give up trying and simply buy and hold some mutual funds hoping to at least match the performance of the broad market.

At Paragon, we believe there is a better way to invest. Our performance tells our story. From January 1, 1998 through October 31, 2010, our Top Flight growth portfolio has generated a net compound annual return of 13 percent versus 3.4 percent for the S&P 500 Index.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Any information presented is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. All opinions and estimates constitute the judgement as of the dates indicated and are subject to change without notice. Do not rely upon this information to predict future investment performance or market conditions. This information is not a substitute for consultation with a competent financial, legal, or tax advisor and should only be used in conjunction with his/her advice.

Volatility Continues

Posted May 20, 2010 by admin. tags:Tags: , , , ,
Rollercoaster


photo by andreia

Written by Dave Young, President of Paragon Wealth Management

After initially recovering from the flash selloff two weeks ago, the markets have spent the past six market days going down.

Including today’s 376 point sell off, from their recent highs, the Dow is down 10.2 percent, the S&P is down 12 percent and the NASDAQ is off 12.9 percent. This is the first official “market correction” since the bull market began 14 months ago.

The VIX, which measures volatility hit 46 today, indicating extreme fear. Historically, a reading above 42 generally triggers a buy signal. That is usually the point where the market reverses and starts moving back up. The only exception to that rule was in the 2008 bear market where for the first time ever the VIX moved beyond 45 and kept going as the bear market got more and more extreme.

So is this going to be a rerun of 2008?

That question stokes the fear and is in the back of everyone’s minds.

This sell off is being driven primarily by concerns over the economic mess in Southern Europe, in other words, Greece, Italy, Spain and Portugal. The list of concerns is too long to put in this blog post. Those concerns come from traders who assume the worst possible scenario. They then further exaggerate the situation by imagining every possible related problem that might occur.

There are legitimate issues to be concerned about. In my opinion, and I emphasize, only in my opinion, I don’t think that this is a return of 2008. I believe that this is a regional issue that is currently causing the U.S. markets a lot of unnecessary grief.

Of course nothing operates in a vacuum, but if you look at the U.S. market alone, it appears to be reasonably healthy.

Earnings, which drive stock prices, have been nothing short of amazing. Companies have consistently beaten their earnings estimates each of the last five quarters. Beating their estimates has caused many companies forward PE ratios to move to a level that normally indicates significant undervaluation.

In summary, it appears that many areas of the market are relatively cheap again. Also, the correction has once again made market sentiment favorable for the U.S. market. In other words, now we see compelling reasons to buy U.S. stocks. The mess in Europe is currently throwing cold water on all stock markets. We believe that once the fear surrounding European mess dissipates, (for whatever reason) our markets and a few others may be very well positioned to resume their upward trend.

What we don’t know, is how long before the fear surrounding the mess in Europe diminishes. It may be soon or it could take a while to play out.

This sell off reminds me a lot of the Asian crisis in 1998. That selloff was short and sharp, and its subsequent recovery was relatively the same.

The most important issue for you as an investor is to make sure that you are invested according to your risk tolerance so that you can ride through the volatility.

Stay tuned…

Paragon Wealth
Management
is a provider of managed portfolios for
individuals and institutions.  Although the information included in this
report has been obtained from sources Paragon believes to be reliable,
we do not guarantee its accuracy.  All opinions and estimates included
in this report constitute the judgment as of the dates indicated and are
subject to change without notice.  This report is for informational
purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.  Past performance is
not a guarantee of future results.

Seeds of recovery unfolding

Posted June 24, 2009 by admin. tags:Tags: , , ,
Seeds of recovery

Written by Dave Young, President of Paragon Wealth Management photo by Tico As a follow up to the Seeds Of Recovery? as seen in Paragon’s 1st Quarter 2009 Print Newsletter, in which we made the case to take positions into areas that move the best after a bear market bottom, I wanted to show you how this current recovery is unfolding. As we predicted back in March these areas include asset classes such as small and mid cap, sectors including technology, consumer discretionary, industrial and emerging markets such as Brazil and China. Shown here with their actual returns between March 9th and June 15th, are the sectors we slated to have the most potential. Financial – Up 94.1% Industrial – Up 49.9% Materials – Up 48.7% Consumer Discretionary – Up 45.9% Technology – Up 43.3% By comparison, a traditional portfolio would include all sectors, such as those below. As you can see, it does not make a lot of sense to hold those sectors that historically do poorly after a bear market. During the same time period their returns are as follows: Utilities – Up 22.1% Consumer Staples – Up 18.2% Telecom – Up 17% Health Care – Up 13.9% Investing in the sectors that historically perform the best after a bear market has produced exceptional results so far. We believe that this is an opportunity that comes along two or three times in an investor’s lifetime and that there is much further potential out performance to be achieved as this cycle progresses.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.    

The Stock Market Drama Continues…Part 2

Posted April 30, 2009 by admin. tags:Tags: , ,
The Bear

As seen in Paragon’s 1 Quarter 2009 Print Newsletter
Written by Dave Young, President of Paragon Wealth Management



photo by nicknbecka

POLITICS

In stark contrast to his popularity with the general public, a recent Wall Street Journal poll of top Economists gave the president an “F” grade for his performance so far. Every day Obama introduces a new program, makes an appearance on television, and there is news from Washington that affect the markets.

According to the metrics we follow, the selloff in October should have marked the bottom of this bear market.

I believe this bear market would have ended last October if it weren’t for the perpetual bad news from Washington.

To recap:

· After the election the market sold off hard and hit new lows on November 20because of investor fears surrounding a new administration.

· As rumors swirled that Obama would govern from the center and not the left, the market rallied up until the first week of January. Hopes were high that the Obama administration would quickly provide a comprehensive solution.

· The market dropped 4% on inauguration day, which is the most it has ever dropped.

· Obama appeared on TV every day and repeatedly used words such as crisis, catastrophe and Great Depression. Traders began to sell the market short during each TV appearance.

· On February 10, the new Treasury Secretary gave a highly anticipated speech about the administration’s new plan to save the banks. The speech was not what the market hoped for or expected, and once again the market sold down to new lows.

· Next, the White House and Congress worked together to jam a $787 billion “stimulus” package (the largest ever) through Congress in four days. Investors were initially optimistic about a stimulus package until they realized it was comprised of one third legitimate stimulus and two thirds social programs. This caused investors to sell stocks again.

· The stimulus bill was followed by a $410 billion omnibus spending bill.

· That was followed by a gigantic proposed budget that will double the national deficit in five years and triple it in 10.

In summary, Obama’s enormous spending plans, proposed tax increases, and lack of focus on the economy caused the market to drop 25% from January 1 to March 9.


WHY BE OPTIMISTIC?

Once you hit a certain point you run out of sellers and there is nothing left to bring the market further down. It appears we may have hit that low point on March 9.

The market was down 54% from its peak at that point, and it appeared as though everything negative had been factored in, maybe several times over. With confidence completely destroyed high yield bond portfolios default rates are projected at double what they were during the Great Depression. Another metric shows consumer spending at the same level it would be if unemployment were 30%. (It’s actually 8.5%)

Looking forward, not backward, things actually look pretty good.

Imagine you were asleep the past 18 months and just woke up. This is what you would find:

· Six of our eight “bull watch” indicators support the case for a new bull market.

· Six of the 10 leading economic indicators were up in February.

· Housing is more affordable and mortgage rates are lower than they have been for some time.

· Energy is more affordable for consumers and businesses.

· Credit is loosening, and interest rates are extremely low.

· There will be massive global government stimulus forthcoming.

· Abundant amounts of investor cash is on the sidelines.

· This has been called “the sale of the century.” In inflation-adjusted terms, the Dow Industrials it is at that same level it was 43 years ago. In 1966 we didn’t have PCs, Internet and our work force was half the size of what it is today.

· Four fifths of top economists in the latest Wall Street Journal survey said now is a good time to buy stocks.

· Investor sentiment has reached negative extremes and started to reverse.

GOING FORWARD

We are holding a significant amount of cash equivalents in our conservative portfolios, and are waiting for tape confirmation that this market has turned before we are fully invested. We are fully invested in our growth portfolios in the areas of the market that have historically performed the best after a bear market. After the 2000-2002 bear market we were close to doubling the return of the market averages by positioning our portfolios in the best places.

As I’ve mentioned before, this is the 34th bear market in the past 100 years. The future always looks bleak when the bear market is the worst, and people become irrationally pessimistic.

That is when the naysayers have their day of fame. The media loves to cover them. They always expect things to get worse, and attract a lot of followers.

They have been wrong every time. Not wrong once or twice, but the past 34 times.

Our economic system is very resilient. Our markets and economy have always recovered from difficult times in the past. We’ve made it through recessions, world wars, a civil war and a depression. I believe in the free market system.

Our market and economy will recover again, in spite of our politicians.

 

Watch Tech…

Posted March 4, 2009 by admin. tags:Tags: , , ,
The S&P 500 Watch

Written by Nathan White, CFA

One of the areas in the market that looks attractive right now is the Tech sector. In the fourth quarter of 2008 the Tech sector was down 26%, which was about 3.4% worse than the S&P 500. Recently as many sectors and broad indexes have broken their November lows the Tech sector has not reached new lows and is showing good relative strength.

This sector has a good record of leading the market during rallies and is an area that we monitor for clues as to when the market might turn. Many bear market studies show that defensive sectors perform well before a market bottom is reached and the higher beta sectors, such as Technology, perform best after a bottom.

Does the Tech out-performance signal that we’ve hit a bottom? In the short-term it is too hard to tell, but since Tech usually leads on the upside and downside it is interesting to see it holding up as many sectors have continued to break down. The forward PE of the sector is 13.4 — a number not seen since before the late 90’s tech boom. We currently hold a position in the sector and like the signs it is showing that indicate a good rally could be near.

Stay tuned…

Paragon Wealth Management Webinar/Seminar Schedule
Are you worried about the stock market and economy? Listen to our free webinars online or at our office.

Thursday, March 19 (12:30-1:30 p.m. MST)
Wednesday, April 8 (6:00-7:00 p.m. MST)
Thursday, April 23 (12:30-1:30 p.m. MST)
Tuesday, May 5 (5:00-6:00 p.m. MST)

R.S.V.P.
Shannon Golladay
801-375-2500
shannon at paragonwealth.com

Earnings (less) Season?

Posted October 23, 2008 by admin. tags:Tags: , , , ,
3rd World

Written by Nathan White, CFA

 Photo by FourthFloor

Isn’t it ironic that the credit crisis induced market crash occurred just before earnings season?

Bad timing?

Well, that’s the humbling mechanism of the market in fine form. There is nothing like a bear market and a recession to give companies cover to lower expectations. Therein lays the silver lining with the current situation.

I believe that times like these give companies cover to bring out all of their dirty laundry. 

Take a look at the management comments on earnings reports that are coming out and you will see some common themes:  “Business has deteriorated due to an uncertain economy, business has been good, but due to the uncertain economic situation we are unable to forecast the future…, due to the current economic environment…, due to the factors beyond our control…, etc.”

At times like these all companies, good and bad, justified or not will take this “opportunity” to lower expectations while performance is low.

Some of it comes in the form of write-offs and charges that wouldn’t come during good times and some of it in the form of lowering guidance going forward.

It’s the “everyone is doing it” mentality of the herd.

Once earnings season is over and everyone’s expectations are rock bottom, what then?

This lowering of expectations is a crucial component of the bottoming-out process and could take a few more months to pan out as the majority of society starts to feel the repercussions of the recessison first-hand. However, once all of the bad news is priced the market usually has no where to go but up.

Another positive note:  companies come out of a recession leaner, meaner and more efficient.

Stay tuned…

Whack-a-Mole Market

Posted September 10, 2008 by admin. tags:Tags: , ,
Wack-A-Mole Game

Written by Nathan White, CFA

 

Bad news after bad news just seems to keep popping up. As soon as we seem to knock down one item of bad news, FannieMae/FreddieMac, another just pos up – Lehman Brothers.

The market is definitely exhibiting the characteristics of a bear market with short sharp rallies that have no legs and just end up fading.

Another aspect of a bear market is when all sectors of the market, either together or one by one, get taken down. Financials were of course the first to go. Technology and most everything else went next.

The last bastions were Energy and Materials as they were supported by high commodity prices. Now that commodities have fallen off a cliff these sectors have also been taken out to the woodshed.

September is historically the worst month for the market and so far it is living up to its reputation (although I might make the argument that July is the worst).

What remains to be seen is whether this is the darkest time before the dawn.

You can’t have a bull market with some sectors going down while others are going up. There needs to be a broad based rally with all areas acting well.

So although oil going down might be good in the long term for the market (reducing production costs for industry) in the short term it can be bad if the effect is to take down the Energy and Material sectors. Look for rallies that have broad participation and staying power.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this article has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this article constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Life Really Isn’t That Bad

Posted July 9, 2008 by admin. tags:Tags: , ,
B/W US Stock Exchange Photo

As seen in Paragon’s second quarter 2008 print newsletter

Written by Dave Young, President

The first half of the year made life difficult for investors.

Worries about the financial sector scared the market down during the first three months. Just as everyone decided “life was not over as we know it,” the market rallied and came back to life during April and May. this was short-lived as high oil prices and inflation prospects gave us one of the worst “June’s” in history.

For the first six months of the year, the S&P 500 finished down -11.9% and the Dow Jones Industrials ended down -14.4%.

Portfolio Performance

Our portfolios performed exceptionally well last year. That’s great, and most of our clients appreciate it.

But, in this business everyone still asks the question, “What have you done for me lately?”

Paragon’s Conservative Portfolio

Our conservative portfolio, Managed Income, has stayed in capital preservation mode. As a result, we have held more cash than normal for the first six months of the year. We have taken selective positions in high yield bonds, dividend paying funds and natural resources. As valuations have reached the ridiculous level, we have been taking some small positions in the financial and real estate sectors. Managed Income is down -1.89% through June 30, 2008. The Managed Income portfolio has done a great job so far this year, considering its first priority is to preserve capital.

Paragon’s Growth Portfolio

Our growth portfolio, Top Flight, has been invested in Canada, Brazil, Steel, Transports, Mid-cap stocks, real estate and energy, to name a few areas. We have also held some excess cash for protection. We have started to see a shift from the international markets back to the U.S. Market. So far this year, our stock selection has added more value than our cash allocation. Recently, we have been reducing our energy exposure and adding more cash. When our models move more positive we will begin reducing cash and increasing equity exposure.

For the first six months of 2008, our Top Flight Portfolio is down only -4.7%. In a very difficult environment, Top Flight actually gained 4.36% over the past three months.

While we are not thrilled to be down at all, with our benchmark the S&P 500 down -11.9% and the Dow Industrials down -14.4% for the first six months, Top Flight has performed well. (See Paragon’s full track record for more details).

Bear Market #34

The bear market we discussed last quarter has continued, and everything we talked about still applies. Click here to read the article about bear market #34.

Since bear market #34 began, over eight months ago, the S&P 500 has lost -16.5%. It has continued for 261 days through June 30, 2008.

Since 1981 the median bear market decline has been -24% and lasted a median of 204 days. However, since 1900, the median bear market has lasted 363 days and taken the Dow Industrial down by -27%. As you can see, this bear has lasted longer than the more recent bear markets, but has been shorter than the historical bear markets dating back to 1900. Also, its decline thus far has not been as deep as normal.

I wish I could tell you when this bear market will end, but unfortunately, no one knows that answer. No one rings a bell to tell us to sell at the top or buy at the bottom. There are two things that we can say with certainty. First, this bear market is closer to being over today than it was yesterday. Second, when a bear market finally ends, historically there are always significant gains.

Investment performance reflects time-weighted geometric composite returns of actual client accounts. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions. The Lehman Bond Index is a benchmark index made up of the Lehman Brothers Government/Corporate Bond. Benchmarks are used for comparative purposes only. The Paragon Managed Income Portfolio is not designed to track the Lehman Aggregate. Past performance is no guarantee of future results. Investments in securities involve the risk of loss.

Bear Market #34

Posted May 6, 2008 by admin. tags:Tags: , , , ,
Bear Market

Written by Dave Young, President (April 6, 2008)

It appears as though we have almost talked ourselves into a recession.

Our U.S. President is elected every four years. What most people don’t realize is presidents only have two productive years, and then we suffer through an election from the next two years.

When Bill Clinton first ran for office he discovered he could win if he convinced everyone that the economy was terrible. Ever since then politicians have shouted one basic theme as loud as they could, “Everything is awful, terrible and bad. You need us (the politicians) to save you.” Since the media loves to promote anything negative, the politician’s message has a direct conduit into our homes.

Twelve months ago our economy was very strong and running on all cylinders. Six to eight months ago we started to get our first glimpses of the seriousness of the problems surrounding the sub prime mortgage market. Even though most facets of our economy were still strong as ever, politicians and their messengers in the media did their best to convince us just how bad things “really” were. And they continued day after day with their drumbeat of doom.

I believe that constant message of doom and gloom has a negative effect on consumers. Recent polls show that four in 10 American adults are holding off on major life decisions and purchases because they are worried about the economy.

Since consumers and consumption drive the economy, if consumers become nervous about their future and stop spending, the economy slows.

That is what has happened. It was amazing how fast we went from  “everything is great” to “everything is horrible”. Consumer confidence dropped from a rating above 105 last July to 64.5 most recently in March.

In March, consumer expectations, which is just one category in the consumer confidence report, was touted as being the worst in 35 years. While that is true and makes good headlines, the overall consumer confidence index was the worst in five years (not 25). Never the less, all of this fear, much of it unwarranted, caused our economy to go from boom to bust, in a short amount of time.

Because the markets are driven by emotions of fear and greed, they retreat in textbook fashion. We endured the worst first quarter in six years. Other than precious metals and some commodities there have been few places to hide. Regardless of where you were invested during the first quarter, everything went down. The S&P 500 declined -9.5%. According to Lipper, the average mutual fund lost -10.6%. The MSCIEAFE international index lost -15% of its value. Even the average “defensive” health care fund lost -10.8%.

In very difficult market conditions, Paragon’s Managed Income portfolio ended the quarter down only -1.46%. Its first objective is to preserve capital which it did very well. Its second objective is to generate as good of return as is possible within its conservative constraints. In view of what we had to work with during the first quarter we feel good about its performance.

Paragon’s Top Flight portfolio declined -9.06% for the quarter. While we never enjoy losing money, we can live with those numbers. Top Flight tripled the S&P 500 last year. This year we are down slightly less than the S&P 500. Traditional financial theory is that if we tripled it on the upside then we would be expected to triple it on the downside. IN fact, while we tripled the index on the upside we were able to hold down our losses and simply match the S&P 500 index on the downside. This is even more impressive when you realize that Top Flight was primarily invested internationally, where many markets experienced significantly greater losses than the S&P 500.

To be continued on Thursday, May 8. Click here to read the second half of the article.

Investment performance reflects time-weighted geometric composite returns of actual client accounts. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions. The Lehman Bond Index is a benchmark index made up of the Lehman Brothers Government/Corporate Bond. Benchmarks are used for comparative purposes only. The Paragon Managed Income Portfolio is not designed to track the Lehman Aggregate. Past performance is no guarantee of future results. Investments in securities involve the risk of loss.

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